Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Here's What to Watch When Atwood Oceanics, Inc. Reports Earnings

Atwood Oceanics(NYSE:ATW) is on the docket to report its fiscal first-quarter results after the closing bell on Tuesday, Feb. 3.

The offshore driller is reporting results amid a swirling storm in the oil market. It's a storm that started in the offshore rig market in late 2013. Oil companies began to pull back the reins on spending for new rig contracts as they struggled to make money on offshore drilling projects, even at $100 oil. Needless to say, this storm has only gotten worse with oil prices plunging last year, which is why Atwood's stock is off more than 40% in the past year.

That being said, as bad as the offshore drilling market is these days, and as bleak as the outlook is for oil prices, Atwood's business is largely insulated from this storm thanks to the strong anchor of its contract backlog. As we see in the following slide, most of the company's rigs are under contract for 2015, which should provide a lot of ballast for the company's earnings this year.

Source: Atwood Oceanics, Investor Presentation.

With that as our backdrop, here's what investors should watch when the company reports earnings Tuesday evening.

First, let's review

Last quarter Atwood Oceanics delivered pretty strong earnings in the face of falling oil prices. The company reported revenue of $323.4 million and net income of $1.72 per share, both of which beat estimates. Driving these results was the strong quarter from its ultra-deepwater drilling segment thanks in part to the addition of the Atwood Achiever, which began to mobilize in the quarter. The commencement of that drillship's contract should drive continued strong results for the ultra-deepwater segment this quarter.

Look at the numbers

Analysts are expecting Atwood to grow its revenue to $356.1 million this quarter, however, earnings are expected to dip to $1.41 per share. That dip is because the company's Atwood Hunter and Atwood Mako weren't expected to put in a full quarter's worth of work because of contract expirations.

What investors want to watch, here, is to see how closely the company came to hitting Wall Street's estimates. There's actually pretty good odds that the company can beat estimates, since it has done so in each of the past four quarters. What would be concerning is if something caused the company to miss estimates, as that tells us that an unexpected event happened, and that could take the stock lower. Wall Street isn't fond of downside surprises.

Look at the backlog

The other area investors should keep an eye on is the company's backlog. This is an area where there has been some good news of late. Subsequent to the end of the quarter, the company did find new work for the Atwood Mako. It signed a short, 70-day contract for the jackup rig at a $155,000 day rate. While that's a bit less than the rig had been earning, and it won't start until late March, it is better than nothing given the current rig market.

Atwood Mako. Source: Atwood Oceanics.

What we want to see is that there are no signs that its backlog is weakening, as any hint that a customer is trying to get out of a contract could send shares lower. Ideally, we'd like to see the Atwood Hunter as well as the company's two newbuild drillships find new contracts soon. However, the company's current plan is to idle the Hunter once its current drilling program is complete, as it has been unable to secure follow-on work for the rig because of the downturn in the rig market. On top of that, the company already pushed back the delivery of the two new drillships by six months as it needed more time to find work for these rigs. This means less revenue and profits in the near term while these rigs sit idle until work can be found.

Investor takeaway

Baring any unforeseen issues, Atwood Oceanics should report a solid quarter. Revenue is expected to be up and profits should be at least in-line with estimates as the company's strong contract backlog helps keep it afloat during the rough oil market. Looking ahead, we'd like to see signs that the company's backlog isn't breaking down. The company will need that anchor to keep it from being damaged by the rough seas that still lie ahead.

Matt DiLallo has no position in any stocks mentioned because his wife wouldn't like it if he bought another offshore driller. The Motley Fool recommends Atwood Oceanics. The Motley Fool owns shares of Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo